Stocks & Markets Thrive in Fed Rate Cut Cycle

Historically, small-cap stocks have thrived once the Fed begins cutting rates. Globally, markets in Japan, China, and the UK currently offer attractive valuations, providing interesting opportunities for investors.

Small and Mid-Cap Stocks: Poised for Gains

According to Brian G. Belski, chief investment strategist at BMO Capital Markets, valuations for small-cap and mid-cap stocks are appealing for investors looking to increase exposure.

Data shows that small-cap stocks (S&P SmallCap 600) are still trading below their 20-year average, while mid-cap stocks (S&P MidCap 400) are only slightly above it. In contrast, the $.SPX(.SPX)$ is trading well above its 20-year average.

Since 1995, in the year following the Fed’s first rate cut, the S&P SmallCap 600 has gained an average of 12.8%, while the S&P MidCap 400 has risen by 10.7%. Meanwhile, the S&P 500 has seen a more modest 6.7% increase. When rate cuts coincide with economic growth, small and mid-cap stocks can return over 20% on average.

However, analysts note that small and mid-cap stocks are currently “deeply oversold” in relative terms. Although they had a strong month in July, strategists believe a reversal is inevitable, based on historical trends.

Top stocks aligned with this theme include:

• Bunge $Bunge(BG)$

• Constellation Energy $Constellation Energy Corp(CEG)$

• Criteo $Criteo SA(CRTO)$

• Dayforce $Dayforce(DAY)$

• Digital Realty Trust $Digital Realty Trust Inc(DLR)$

• Entegris $Entegris(ENTG)$

Global Opportunities: Japan, China, and the UK

The world’s largest asset manager, BlackRock, highlights the relative attractiveness of global markets, especially in Japan, China, and the UK.

BlackRock remains optimistic about Japanese stocks and is overweight on the UK market, although they express some caution due to the UK’s stagnating economy and upcoming budget announcement from the new government.

China is also on BlackRock’s radar, with indications that significant fiscal stimulus measures may be on the way. The firm suggests a moderate overweight on Chinese stocks, while keeping an eye on the country’s long-term structural challenges.